Introduction

Every small-business owner is likely to feel dependent on their bank to some extent. Irrespective of whether the business needs to count on consistent support during hard times or feels it has backing for its growth plans when new opportunities present themselves, bank–business relationships matter. Throughout the post-war period, British SMEs’ relationships with their banks were likely to reflect the general indifference of those banks to the SME sector and to local conditions. In contrast, bank–business relationships have been identified as one of the critical elements in comparative German economic success, along with vocational education and industrial relations. Though it is the participation of great ‘universal’ banks in the affairs of major corporations that is most often seen to have been the special feature of German industrialisation, there was in fact a distinctive three-pillar system of national, local, and cooperative banks that emerged after the Second World War to serve the particular needs of different types of business. German banks provided long-term funding, especially to smaller firms, within a stable financial system that permitted banks to provide consistent support. That system relied on prudent regulation and a “federalist form of corporatism”, which allowed smaller, regional institutions to modernise and develop in support of the SME sector, funded by savers.

A comparative analysis of the evolution of SME and banking relationships in Britain, France, Italy, and Germany shows that as British SMEs increasingly struggled, Mittelstand companies continued to thrive into and beyond the 1970s. The support of their Hausbank (house bank, a term in universal usage) was fundamental to each company's success, and the much larger number of small firms in Germany reflected – and sustained – the more segmented banking system. Small firms were additionally supported by public policies to strengthen their position in post-war West German society, including tax concessions, low-interest funds, and support for trade associations, chambers of commerce, and professional quality standards. When the economic crises of the 1970s struck, financial support was strengthened still further.

West Germany

The West German approach was based on the principle of state support for companies’ long-term, stable relationships with their banks, so that firms could pursue long-term objectives such as the research and development (R&D) and training necessary to deliver diversified quality production. In comparison to Britain, the German banking system was less concentrated and had many more banks.